The fundamentals of banking applied to the credut crunch, Part 1

When reading this, you may disagree with what I say, or you might think I am wired to the moon, but at least I have made you think. Today in politics, when things go very wrong, those responsible no longer resign, they talk their way out of trouble in sound-bites. The press and I, three years ago were warning that the burgeoning national internal debt would lead to trouble, yet the government did nothing about it, for whatever reason. If they got us into this mess, why should we believe they will get us out of it? I give here, a simplistic, and personal, not professional, assessment of the development of banking and in Part 2, suggest how the credit crunch should have been tackled. Historically there were individuals who travelled the world lending money to kings, emperors, etc, to enable them to carry out huge projects such as wars, on the strength of a promissory note for repayment with interest within a time limit. The borrowers couldn’t afford to welsh as they would need to be borrowing money again. The lenders, like bookmakers, shared the risk, in case the borrower was unsuccessful and had been killed in the meantime. The average citizen possibly borrowed from a pawnbroker in a similar manner, but saving probably started for the man in the street in the Victorian era, where people put away money for a rainy day, to pay for a funeral, and healthcare. After WW2 building societies really opened up, virtually allowing people to lend money to them at a small interest rate. This was seen as a safe haven as it was supported by tangible assets. Then the sudden switch by the building societies to become banks, where the assets were now dependent upon the state of the financial market, was a worrying trend, and the writing was on the wall.

The pension funds are a different kettle of fish to savings, and a lot of them are conducted by investment in the stock exchange, and therefore do not fit into my definition of savings. I have always believed, ever since the pension fund of the newspaper workers in London was raided, that pensions for all should be a matter of government responsibility on the same principle, where the employer makes a contribution as well as the worker. The paperwork is virtually done through the Inland Revenue. If you take the pensions system over all, once the balance has been built up between savings and outgoings, the differential will be minuscule as a percentage, while the government will have the benefit of the capital. In this way it is possible for workers to shift from one job to another and carry the pension with them. I lost eight years of pension through working for the government in the Navy and several other government departments, because my pension was not contributed to by me. This situation would then be avoided. Pension funds are raided now on a regular basis, and this is a scandal. If the government takes over the pension funding system, the outgoings, initially, will be greater than the income, but will not be crippling, because it is paid on a weekly or monthly basis, while at the same time a commensurate amount of money is building up the fund. For five or six years there might be a deficit as a result of our generation living longer, but I believe that longevity will return to a lower level as a result of the lifestyle currently enjoyed

The majority of people saving their money either used the building societies, or were of an older generation, as we are, and saved at a low interest rate in the bank. People with large sums of money tended to invest in the stock exchange, which is a different kettle of fish, and I am not suggesting that this money should be repaid. Operating on the stock exchange was always a risky business and never more so than now.

Categorized as General

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